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The real picture: Industry specific exchange rates for the euro area

Simon Sosvilla-Rivero () and Sonia Pangusión

No 2005-05, Working Papers from FEDEA

Abstract: The evolution of the exchange rate of the euro vis-à-vis the currencies of the trade partners have an effect on the Euro Area's industrial price indices and, therefore, in the economy as a whole. In general, when referring to the exchange rate as a variable that affects such indices and the competitiveness, the discussion is based upon the effective real exchange rate (i. e., the euro as an index weighted with the currencies of the Euro Area´s main trade partners, being the weights assigned to each currency the proportion of each trade partner on the total trade in the Euro Area). Nevertheless, the evolution of the exchange rate of the euro vis-à-vis the US dollar, the Japanese yen or the Chinese Yuan, to name a few, could have different effects on different products or industries, because the trade weight of USA, Japan or China also varies among products or industries. Therefore, although the importance of some countries in a specific industry could be very different to its wight in the aggregate index for the whole Euro Area, the effective exchange rater indices do not take into account such fact. The aim of this paper is to construct an industry-specific effective exchange rate aggregate that accounts for such differences, taking into account the main trade partners in each industry.

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